Sunday, January 23, 2011

Start Your Business on a Sound Footing

“Growth for the sake of growth is the ideology of the cancer cell.” ~Edward Abbey

The normal way to expand your business, especially in retail, is to expand the number of physical locations. If you are making money at one location, then adding another location normally increases the total profits of the company. However, this is not always the case.

We've been assisting a small auto repair business that had been in business for about 3 years. However, for this entire time period, the business has never been profitable for numerous reasons, including an absentee owner, not marketing very well, and not having any real processes in place to manage the company.

Additionally, with these losses the cash-flow of the business was very sparse, forcing the owner to watch every cent, to defer paying many creditors, and put all of his savings into the business.

The owner thought that the only way that he could make it financially was by finding a new location and working at it full time. He figured it would subsidize the older shop that was losing so much money. He was able to get the new location without any down payment and was able to finance the small inventory he needed to keep on hand.

For about six months, he worked hard to get the new shop up and running while the old location hemorrhaged more and more cash. He tried to reduce prices to bring in new business at both locations, but this didn't work, nor did just about anything else he tried.

Where before he was losing money from just one location, now he was hemorrhaging even more cash from two.

When we started to work with him, he just could not get any focus at all because he felt totally out of control. It was hard for him to concentrate and he was becoming very irritable towards his employees as well. We tried to encourage him to close one business but he couldn't because he had signed long-term leases for both locations.

In addition, he felt like he would be a failure if he closed the business that he had been dreaming about owning for so long.

Finally, he had no other choice but to file bankruptcy to get out of the mess he had created. When I asked him what he had learned from this experience, he said that he should have never opened the second location, and that he should have concentrated on the first one to make sure it was both profitable and running smoothly before he expanded.

Expanding - while feeling good - is fraught with difficulties. Now go out and make sure that before you expand your business, that you are running a very efficient and profitable enterprise.

About Me

Dr. Osteryoung is a Consultant to Businesses and the Founding Director of the Jim Moran Institute for Global Entrepreneurship in the College of Business at Florida State University, the Jim Moran Professor of Entrepreneurship(Emertis); and Professor of Finance(Emertis).
Dr. Osteryoung received an undergraduate degree in Industrial Engineering from Georgia Tech, an MBA from the University of South Florida, and his doctorate from Georgia State University. He consults with entrepreneurs throughout the State of Florida. Over the last fifteen years, he has directly assisted over 3000 entrepreneurs.